James Forth - National Sales Manager
It’s difficult to believe that it’s been more than four years since the Prudential Regulation Authority (PRA) brought in the stricter buy to let underwriting standards back at the start of 2017.
The move led to a lot of PRA-regulated companies choosing to adopt a ‘bucket’ approach to lending and increasing their Interest Coverage Ratio (ICR) from 125% to 145%. At a stroke, many borrowers found they were unable to secure the loan size they needed.
However, as one of the UK’s leading specialist lenders, here at Precise Mortgages we decided to adopt a different approach to maximise affordability. We take every customer’s individual circumstances into consideration which enables us to create ‘blended’ ICR calculations to optimise the performance of each applicant’s situation and ownership structure.
Let me give you a couple of examples to show how a blended ICR works.
Say you’ve got an individual customer who’s a higher rate taxpayer and wants to purchase their first buy to let property valued at £250,000. The estimated gross rental of the new property is £1,125 per month.
The customer wants to borrow £187,500 using a two year fixed rate buy to let mortgage with an initial rate of 2.79% and a revert rate of 5.50%.
Even though the customer earns £5,000 a month gross, assessing their affordability at an ICR of 145% would mean they could only borrow £166,752 – more than £20,000 less than they need to buy the property.
Now let’s say this same customer was to approach you about buying the exact same property, however on this occasion they were looking to apply with their partner who, let’s say, is a basic rate tax payer and takes home £1,000 a month gross. Because there are now two applicants we can create a blended ICR based on their joint tax position and they’re now able to achieve the £187,500 loan they need.
Try putting these details through our Buy to Let Calculator for yourself to see how our blended ICR calculation can work.
The calculator shows you how much your customers could borrow from us before you start the application process. It also enables you to compare and contrast different ways of setting up cases to help you achieve the best outcome for your customers.
I should mention that the solution may not be suitable for everyone and making sure your customers get the best advice for their individual circumstances is crucial.
If you’d like to find out more about blended ICRs or have a question about our Buy to Let Calculator, don’t forget you can always speak with a member of our Sales Team or call our dedicated support service on 0800 116 4385.